Photo by James Bareham
UBS believes that Tesla (NASDAQ: TSLA) could become one of the most valuable software companies in the world, in light of which, the firm's analyst raised its target price for TSLA shares from $325 to $730.
UBS analyst Patrick Hummel believes Tesla's leadership in electric vehicles could help it become one of the world's most valuable software companies, he wrote in a study published on March 3.
The Swiss multinational investment bank and financial services company said that while legacy automakers may challenge Tesla in terms of electric vehicle production, the California-based manufacturer will dominate the software space. According to UBS, software is likely to be the next industry for automakers to compete for influence.
"Software is likely the next battleground in the global car industry, and no other carmaker is closer to monetize fully autonomous driving for everyday use, and the scalability of Tesla's technology creates the biggest software-driven revenue opportunity in the industry."
The firm wrote that while Tesla will co-lead in electric vehicle sales with Volkswagen, the former will become the most profitable automaker thanks to a software monetization opportunity.
Given the outlook, Hummel raised its stock target by 124% from $325 to $730. UBS predicts that Tesla is generating $20 billion in operating profit by 2025, with $9 billion of that coming from software—mainly from full self-driving (FSD) software. This year Tesla earned less than $1 billion from software. Hummel notes that a dedicated fleet of robotaxis could further boost the company's software revenues in the future.
In addition to autonomous driving, Tesla is also working on in-car media and gaming, as well as subscription services and insurance. Over time, the cost of the software will decrease. This will only make sense as more devices are deployed, which means that it’s only realistic for the largest automakers to develop such in-house options.
“The total software revenue pool is bigger than the size of the global car sales revenue pool by 2030...those who control the software could generate up to $ 54k additional revenues per car, and this is an annual recurring number.”
UBS teamed up with a group of company software researchers and compared Tesla's software capabilities to that of Salesforce, Nvidia, Alphabet, Adobe, and the cloud services divisions of Microsoft and Amazon. Of course, these companies are already making billions in software annually, while Tesla's opportunities are wholly in the future. However, the company has found that the automotive market presents even more opportunities.
"Valuing Tesla's software opportunity is a bigger, higher-risk bet on the future, but the potential is even bigger than the TAM of most software companies."
© 2021, Eva Fox. All rights reserved.
We appreciate your readership! Please share your thoughts in the comment section below.
Legal Disclaimer --
This article is for informational purposes only. You should not construe any such information or other material as an investment, financial, or other advice. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer by Eva Fox, Tesmanian, or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.
Eva Fox holds zero shares of Tesla, Inc., and currently (at the time of this article's publishing) holds zero options or securities in Tesla Inc. and/or its affiliates.
About the Author
Eva Fox joined Tesmanian in 2019 to cover breaking news as an automotive journalist. The main topics that she covers are clean energy and electric vehicles. As a journalist, Eva is specialized in Tesla and topics related to the work and development of the company.